Rob strand

The Winding Road of Economic Recovery

Bank Capital Markets and Tax Institute

November 14, 2013

Rob StrandSenior Economist, ABA

aba.com 1-800-BANKERS

Inflation-Adjusted GDP

Source: U.S. Bureau of Economic Analysis and NBER

$13

$14

$15

$16

2003 2005 2007 2009 2011 2013

$Trillion

Recession

State Indexes of Leading Indicators

Over 2

1—2

0—1

Decline

Source: Federal Reserve Bank of Philadelphia, August 2013

Business Confidence

Source: NFIB, Thompson Reuters/University of Michigan

Index Values (2

005=10

0)

50

60

70

80

90

100

2005 2007 2009 2011 2013

Small Business Optimism

Consumer Sentiment

$0

$4

$8

$12

2000 2004 2008 2012

Bank Deposits and Loans

Deposits

Loans

$Trillions

Source: Federal Deposit Insurance Corporation

Quarterly Inflation-Adjusted GDP Growth

‐6%

‐3%

0%

3%

6%

2009 2010 2011 2012 2013Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

Government Pullback

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

‐6%

‐3%

0%

3%

6%

2009 2010 2011 2012 2013

Total GDP Municipal Government Federal Government

Business Firms are Wary

‐6%

‐3%

0%

3%

6%

2009 2010 2011 2012 2013

Total GDP Net Exports Business Investment & Inventories


Consumer-Driven U.S. Economy

‐6%

‐3%

0%

3%

6%

2009 2010 2011 2012 2013

Total GDP Consumer Spending


Source: Clay Bennett, The Christian Science Monitor

Federal Receipts, Outlays & Deficit to GDP

0%

20%

40%

60%

80%

1973 1983 1993 2003 2013 2023

Source: U.S. Congressional Budget Office

Receipts

Outlays

––– Forecast –––

Federal Deficit

FY2013: $680B, 4.1% of GDP

FY2012: $1.1T, 6.9% of GDP

Entitlements will Overwhelm Revenue

Source: U.S. Congressional Budget Office (September 2013)

0%

5%

10%

15%

20%

25%

30%

35%

2000 2010 2020 2030 2040 2050 2060 2070

Social Security

Medicare

Medicaid

Other

Forecast

Interest

% of GDP

Deal of October 17

• Continuing Resolution to January 15

• Raises the Debt Limit to carry to February 7

• Bicameral committee to report by December 13

• 16 days back pay for 850,000 federal workers

• Requires a process for income verification for ObamaCare health insurance subsidy applicants

• $3.3B new funding for dams, floods, forest firesSource: Continuing Appropriations Act, 2014

Impact of a Federal Default

• 20% cut in outlays in an average month

Economic slowing Deeper cuts

• Higher interest rates?

Less investment, home buying, etc.

Capital losses for financial institutions

Weaker dollar more exports

• Weaker consumer and business confidence

Treasury Bill Interest Rates

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: Federal Reserve

Twelve-Month Three-MonthSix-Month One-Month

FY2014 Revenue Deficiency

None1%—3%3%—5%6%

Source: National Association of State Budget Officers

Revenue/ExpensesShortfall

Assets/Liabilities for Municipal Pensions

Source: Boston College Center for Retirement Research

0%

25%

50%

75%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median for 126 State and Municipal Pension Plans

FY2014 State General Fund Spending

• Projected $728 billion, up 4.1% Surpassed pre-Great-Recession high

(non inflation-adjusted)

• Major categories: Medicaid ~ 24% K-12 Education ~ 20% Higher Education ~ 10%

Source: National Association of State Budget Officers

Source: Scott Adams, Dilbert, September 6, 2013

Business is Growing

Business Indexes

80

90

100

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 2013

Industrial ProductionISM Non-

Manufacturing

Contraction Expa

nsion

ISM Manufacturing

Sources: Federal Reserve, Institute for Supply Management

U.S. Exports

($150)

($100)

($50)

$0

$50

$100

2007 2008 2009 2010 2011 2012 2013

GoodsServices


$Billions, Quarterly Change on SAAR,

Corporate Profits

Source: U.S. Dept. of Commerce: Bureau of Economic Analysis

$0.0

$0.5

$1.0

$1.5

$2.0

2001 2003 2005 2007 2009 2011 2013

With inventory valuation and capital consumption adjustments, SAAR, $Billions

Domestic

0

400

800

1200

1600

2005 2006 2007 2008 2009 2010 2011 2012 2013

S&P 500 Index

Source: Standard & Poor’s

Up 134%

Up 15%

VIX Index of S&P Volatility Futures

0

20

40

60

80

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Chicago Board of Exchange

Consumer Driven Recovery

Don't sit there mumblin', talkin' trash.

If you wannahave a ball,

you gotta go out and spend some cash …

Let the good times roll.

— B.B. King

Housing Starts

Source: U.S. Department of the Census

0

1

2

1963 1970 1977 1984 1991 1998 2005 2012

1959–2010 Average

August2013:891K

Millions of Units

Conventional 30-Year Mortgage Rate


0%

3%

6%

9%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

4.2%

Home Sales

-

3

6

9

1999 2001 2003 2005 2007 2009 2011 2013

Millions of UnitsSAAR

Sources: Census Bureau, National Association of Realtors

New Homes

Existing Homes

26 Million Millenial’s Live with Relatives

43%

39%

35%

36%

2012

2007

1981

1968

Source: Pew Research Center on 18-31-year-olds

Highest in Four Decades

Retail Sales

Inflation & Seasonally‐Adjusted Semi‐Annual Growth Rate on Quarter Average

‐15%

‐10%

‐5%

0%

5%

10%

1994 1998 2002 2006 2010Source: U.S. Dept. of Commerce: Bureau of Economic Analysis

Automobile Sales

Source: Autodata Corp.

0

5

10

15

2010 2011 2012 2013

SAAR in Millions

Average Age of Vehicles

Source: HIS/Polk

0

4

8

12

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Passenger Cars Light TrucksYears

Consumer Credit

Revolving Non‐Revolving

Seasonally Adjusted Change Over the Last 6 Months

$75 Billion

($1 Billion)


Student Loan Debt

Source: Federal Reserve Bank of New York

$0

$300

$600

$900

2005 2006 2007 2008 2009 2010 2011 2012

$292

$307

$154

$106

$ Billions

Under 30

60+

Average Tuition, Fees, Room and Board

Source: The College Board Annual Survey of Colleges

$0

$10,000

$20,000

$30,000

$40,000

1973‐1974 1981‐1982 1989‐1990 1997‐1998 2005‐2006 2013‐2014

Public 4‐Year School(3.2% 2003‐2013 annual growth rate)

Private 4‐Year School(2.1% 2003‐2013 annual growth rate)

2013 Dollars

Proportion with Home-Secured Debt at 30

0%

10%

20%

30%

40%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Have Student LoansNo Student Loan

Source: Federal Reserve Bank of New York

Unemployment Rate

0%

5%

10%

15%

1994 1998 2002 2006 2010

7.3%

Source: U.S. Department of Labor, Bureau of Labor Statistics

13.8%

Unemployment

Underemployment

Under 4%

4%—5½%

5½%—7%

7%—8½%

Over 8½%

Unemployment Rate

Source: U.S. Dept. of Labor, Bureau of Labor Statistics, Aug 2013

9.5%

3.0%

7%

3.8%

8.7%

U.S. Payroll Growth


(900,000)

(700,000)

(500,000)

(300,000)

(100,000)

100,000

300,000

500,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

8.7 Million Jobs Lost

7.2 MillionJobs Recovered

GDPBroke Even

Loss in Payrolls from Pre-Recession Peak

‐8%

‐4%

0%

0 10 20 30 40 50 60 70

1948 1953 1957 1960 1969 19731980 1981 1990 2001 2007


Unemployment Duration


0

5

10

15

1971 1978 1985 1992 1999 2006 2013

Less than 5 Weeks

5–14 Weeks

Millions

27+ Wks

Labor Force Participation at 1978 Level


45%

55%

65%

75%

1976 1982 1988 1994 2000 2006 2012

Men

Women

Personal Income


‐12%

‐6%

0%

6%

12%

2001 2003 2005 2007 2009 2011 2013

Seasonally‐Adjusted Quarterly Growth on Quarterly Average

Median Family Income

$40,000

$45,000

$50,000

$55,000

1985 1989 1993 1997 2001 2005 2009 2013

Sources: Census Department and Sentier Research, LLC

Rebuilding Wealth

Source: Bureau of Economic Analysis and Federal Reserve

Household Wealth0%

2%

4%

6%

$0

$20

$40

$60

2004 2006 2008 2010

Savings Rate

Household Net Worth

2013

$Trillions

Lots of Liquidity from the Fed

Federal Funds Rate Hikes in the Past


0%

1%

2%

3%

4%

5%

6%

7%

‐1 1 3 5 7 9 11 13 15 17 19 21 23 25

Fed

Fund

s Ta

rget

Rat

e

Months Since Tightening Began

19942004

2000

Long Term Forecast

Fed’s Balance Sheet Growth


$0

$1

$2

$3

2008 2009 2010 2011 2012 2013

$Trillion

MBS & Agency Debt

Treasuries

November 6: $3.8 Trillion$1.5T

$2.1T

Economic Uncertainties

• Federal budget, debt and taxes

• ObamaCare (Affordable Care Act)

• Interest rates

• Global demand

• Fannie, Freddie and QM/QRM standards

• Student debt

U.S. Traditional Advantages Continue

• Strong global competitor

• Robust entrepreneurial culture

• Flexible capital and labor markets

• Technological leader

• Highly diverse mix of industries

For more, see our blogs:

Dodd-Frank TrackerRegReformTracker.ABA.com

Banks and the Economywww.BanksAndTheEconomy.blogspot.com

aba.com 1-800-BANKERS

Rob strand

Economy & Finance

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